The Gundlach Effect

by: Balance Junkie

If I were one of these crazy hedge fund guys, with the slick haircuts and fancy shoes and racing stripe shirts, the trade I’d put on is 10-times-leveraged natural gas long versus 10-times short Apple.

~ Jeffrey Gundlach, April 26, 2012

The quote above is from the latest presentation given by DoubleLine’s Jeffrey Gundlach. For those who aren’t familiar with him, Mr. Gundlach has been anointed by many as “the new bond king,” taking over for PIMCO’s Bill Gross. When he talks, people listen. Josh Brown was in attendance at the event and was kind enough to share his Notes from the DoubleLine Lunch.

At the time Mr. Gundlach made his short Apple/long natural gas pair trade recommendation just a week ago, Apple (NASDAQ:AAPL) had just reported killer results and resumed its upward trajectory after a short but steep correction. Natural gas was bouncing a little from its latest tumble in a multi-year shellacking. It’s only been a week, but Apple has continued to slide and natgas, to rally. For now, Mr. Gundlach’s trade is working. I wonder whether that has anything to do with fund managers taking his advice?

On Stocks, Debt, Austerity and Fed Futility

So what else did Jeff Gundlach have to say? I’ll hit a few of the highlights that stood out to me below. (Again, this is courtesy of the Reformed Broker. You can read the full article for a lot more detail.)

  • The Shanghai market is a great leading indicator for stocks.
  • The wealthy don’t pay enough taxes in the U.S.
  • Like the Roman Empire, the U.S. spends a ton of money on the military, although healthcare and Medicare are also huge budget-busters.
  • QE has boosted stock prices, but hasn’t accomplished much more than that. (Check out his Bernanke Wheel of Fortune slide.)
  • The middle class is facing biflation.
  • Developed countries are sitting on unsustainable piles of debt.
  • The possibility of civil unrest is rising in Europe given extremely high rates of unemployed youth, especially in Spain and Greece where youth unemployment recently passed 50% (not a typo).
  • Apple’s chart looks just like Google’s (NASDAQ:GOOG) did just as it topped out in 2007.
  • “Austerity is guaranteed to lead to a weaker economy no matter where it takes place and the alternative, a continuation of debt-financed solutions – is even worse.”

If more debt-financed stimulus is not the answer, and austerity only leads to economic depression, what does Mr. Gundlach think the Fed should do? According to Josh:

Jeffrey says that the right thing to do is the hardest – let the debt clear and have a depression. You could hear a salad fork drop when he says this.

But of course, we’ll never do this, he says. So in the absence of letting the everything reboot, at the very least the Fed should “stop with the manipulation of markets.”

I found a lot of these insights very interesting, but of course, the Apple/natgas trade was the one that grabbed the most headlines. I’ve been tempted to dip into some natural gas from time to time, but have not pulled the trigger yet, as it just keeps falling. Let’s see how it acts on the next pullback after the current bounce. If it can hold the previous low, I think we’ll consider a small position. Mr. Gundlach did emphasize that these were longer-term trades, and I would concur.

How about shorting Apple? Mr. Gundlach may be proven right on that trade too, but I can’t bring myself to put any money on the table for that one. I enjoy the products too much to bet against them!

What about you? Any thoughts on the Apple/natural gas trade or any of the other ideas advanced by Jeff Gundlach?